Notwithstanding the troubles with toxic loans, Public Sector Banks (PSBs) saw the highest Labour Cost Efficiency (LCE) among all 159 scheduled commercial banks, reveals the latest study by Reserve Bank of India (RBI) researchers.
During 2005-2018, LCE of all banks moderated, but the deterioration was sharp during 2011-2016 — a period of severe stress for the banking industry. Interestingly, PSBs fared better than their peers, giving an additional rationale for recent mergers and even suggesting that more mergers could be explored, according to the authors of the report.
The 159 scheduled commercial banks between them operate over 1.4 lakh branches. The study was conducted on 75-84 banks during three periods — 2007 (financial crisis year), 2012 (asset quality stress) and 2018 (latest data).
Between 2000 and 2010, bank branches grew faster than the workforce and though the per employee cost of private banks grew moderately, their workforce increased manifold. In contrast, although the per employee cost of PSBs grew more than private banks, their employee base remained stable, while foreign banks employed less but had higher paid staff.
As per the study, PSBs were more efficient than private lenders, reflecting deceleration in employment growth and cost cutting through innovative techniques. As the number of branches began to shrink beginning 2015, employment growth too went downhill.
Paradoxically, the per employee output in terms of deposits, loans and advances, investments and non-interest income increased, suggesting that labour cost efficiency for state-run lenders improved.
But, despite rapid technology adoption, LCE didn’t keep pace. “The results upend the popular belief that private and foreign banks are more efficient than state-run peers, while in reality, PSBs’ LCE is higher, reflecting higher per employee output of the former even as staff accretion decelerated sharply than in the latter,” the report’s authors noted.
Cost efficiency is defined as the ratio of the actual profit of a bank to the maximum level that could be achieved by the most efficient bank, while labour productivity is computed using key banking aggregates like investments, advances, deposits and total income.
The latest study found that labour efficiency of PSBs improved over time and they overtook private lenders in 2018, when state-run lenders were facing an acute asset quality stress. One reason was due to an increase in banking correspondents, who are paid lower than the bank staff, but whose expenses aren’t captured in the staff cost account. Yet, deposits mobilised and credit deployed by them pushes up output indicators. Likewise, other work processes too are outsourced, which may have increased labour productivity.
On the other hand, a sharper growth in employees seems to have overshadowed the cost advantage of private banks leading to moderation in efficiency gains relative to PSBs.
“For instance, when alternate per employee banking aggregates like non-interest income, operating profit and net profits are used, efficiency gains are no longer apparent,” the report explained.
LCE of all banks stood at 0.72 around 2005, implying that 28 per cent cost could have been reduced while producing the same level of output. In 2018, this metric worsened to 0.61 indicating that while banks were relatively efficient in allocating inputs, they failed to obtain maximum output.
The profitability density function for 2007 was also skewed, indicating the robust performance of all banks in 2007, when deposits and credit accelerated along with asset quality improvement, while the wage bill decelerated. In 2012, however, it showed twin peaks, probably due to the relatively lower order of balance sheet expansion of banks, a dip in profitability and the onset of asset quality woes. Cost efficiency, meanwhile, improved in 2018 due to higher credit off-take by private and foreign banks as well as the rationalisation of bank branches, which led to wage bill deceleration.
The efficiency of private sector banks may have been pulled down due to the performance of old private banks, since these lenders witnessed the lowest growth in loans and advances, deposits and investments among all bank groups in 2007, even though balance sheets of new private banks grew in double digits. The void in the lending space created by PSBs due to mounting NPAs also boosted credit supply of private banks, which reported higher net profits due to lower provisioning.
How they did it
Between 2000 and 2010, bank branches grew faster than the workforce and though the per employee cost of private banks grew moderately, their workforce increased manifold
In contrast, although the per employee cost of PSBs grew more than private banks, their employee base remained stable. Foreign banks, however, employed less but paid staff better